Where is support level for Jersey oil and Gas share price after Verbier drill miss? (JOG)

The share
price of Jersey Oil and Gas (LSE:JOG) plummeted over 60pc on Thursday after the
firm reported disappointing news from the Verbier appraisal well. The drill failed
to encounter the targeted Upper Jurassic sands and, as a result, the contingent
resource estimations for the discovery are likely to be revised down to the
lower end of initial resource projections.

The failure
of this high-profile drill, which was hotly anticipated by AIM investors,
highlights the extreme risks of remaining invested through the drilling
process. Many investors would have perhaps taken some reassurance from the
involvement of big players such as the operator Equinor (previously Statoil),
and a large investment from Schroders, but the fact remains all exploration
drilling is high-risk.

What makes
matters worse in the case of junior explorer Jersey Oil and Gas is that the
company’s valuation is heavily aligned with the Verbier discovery and the P2170
Licence in which it is situated.

However, it would be very premature to write the asset off at this stage. New data from the well will be analysed and the commercial viability of Verbier reassessed. Longer-term shareholders have previously experienced the wild ride of huge disappointment and subsequent success after the first drill of Verbier failed, only for a subsequent sidetrack well to hit the jackpot. Can it happen again? Anything is possible, however if it looks more likely that the resource is smaller than hoped then Equinor may opt to cut its losses.

Jersey Oil shareholders are no strangers to turbulent price movements

Arguably in the best-case scenario Jersey Oil will still
need to fund its 18pc share of any further drilling at Verbier. The last drill
cost the firm around £9-11m so will Jersey need additional funding?

We know the cash balance was £22.1m as of the end of June 2018 and administrative costs for the first half of 2018 were around £900k. Deducting the drill expenditure and a guestimated £1.45m in administrative costs for the past nine months, suggests a current estimated cash balance in the region of £10-11m. On that basis, the company is likely to need to raise again should further drilling be sanctioned with comparable costs.

At today’s 80p share price, Jersey oil has a Market Cap of £17.5m. Its approximate cash balance today equates to around 50p per share, so the market currently attributes around £7m, or 30p per share to the firms 18pc share of the P2170 Licence.

If Verbier proves to be commercially viable then this
valuation is extremely low. Even at the lower estimate of gross recoverable
resource at 25MM barrels of oil equivalent (boe), the previously stated Net Present
Value (NPV10) for Verbier is £31.2m net to Jersey Oil. Add in the Cortina and
Meribel assets at a similiarly low estimate and the NPV10 totals £83.7m for the
licence.

Everything rests on the commercial viability of the license.
Clearly if fresh data from the appraisal well determines this as a much less
attractive proposition for Equinor then the share price will likely see further
pressure towards its cash valuation.

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Stuart Langelaan does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the piece.

Stuart Langelaan has not been paid to produce this piece by the company or companies mentioned above.

Dynamic Investor Relations Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

The S&P500 has reached new highs again. It’s likely to run on to tackle the 3000 milestone level shortly, where the chart suggests strong headwinds lie. But during the past decade bull run, (assuming we’re still in one) investors have seen this scenario play out positively before - where a big move upward followed with gusto, despite seeming unlikely. Will the third time be so lucky?

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